When Apple approached record companies about selling their music digitally five years ago, they "were extremely cautious and required Apple to protect their music from being illegally copied", according to Steve Jobs's recollection of the process. That meant using digital rights management (DRM) - a software wrapper - to protect songs from unlimited copying. Jobs says it is crucial to the contract: "If our DRM system is compromised and their music becomes playable on unauthorized devices, we have only a small number of weeks to fix the problem or they can withdraw their entire music catalog from our iTunes store."

But what's the real effect of DRM? Last year, EMI began offering songs without it on iTunes. "The industry has finally been able to get some hard data about how removing DRM restrictions from legitimately purchased tracks affects piracy," says Bill Rosenplatt, DRM specialist and president of GiantSteps Media Technology Strategies. "The statistics show that there's no effect on piracy."

No effect. The assertion is remarkable. If DRM does not in fact discourage piracy, then it is merely a nuisance for the user. Now the Guardian understands that most download stores will remove DRM on permanent music downloads. "We are going to be selling non-DRM music from the summer", says Dave Elston, HMV's digital content manager, adding that it would solve "obvious interoperability issues" - primarily compatibility with Apple's iPod. Amazon has announced that its DRM-free MP3 download store, already online in the US, will be rolled out internationally later this year. Napster in the US is moving to MP3 for non-subscription downloads, and sources close to the company implied that the UK service will follow suit. And Apple offers DRM-free downloads for an increasing number of tracks.

Ironically, the music companies are now abandoning DRM because it worked too well. Apple wouldn't license its version to rivals - so the best-selling iPod drove the iTunes store to its present position, where it is the third-largest music retailer in any form in the US. Rosenblatt says that record labels "have been desperate to find a viable competitor to Apple and iTunes". Industry sources suggest that Apple's iTunes store has more than 70% of the UK download market, and growing. "The record companies don't like dealing with Apple, because Apple is in a position where it can dictate the economic terms and dictate the business models," says Rosenblatt. "What's going to draw people away from iTunes? One answer is to get rid of DRM."

Licences revoked

In the meantime, some early adopters are suffering the consequences of DRM's failure. Last month, former customers of Microsoft's defunct MSN Music store in the US received an unwelcome email. "As of August 31, 2008, we will no longer be able to support the retrieval of licence keys for the songs you purchased from MSN Music or the authorization of additional computers," it said.

So what does that mean? Protected music files are encrypted and locked with a key. To play the file, the media player must acquire a digital licence that is specific to the PC or portable device on which it is played. The licence may permit music to be copied to other computers or devices, but each device must be individually authorised by an online licence server. Without such a server, former customers of MSN Music will not be able to play their DRM-protected music on any new PCs or portable players that they buy.

The problem is worse than it first appears, since a "new" device may actually be your existing PC. Some users habitually reinstall Windows to keep it running sweetly, but doing so removes its authorisation; even adding or changing a hardware component can also break the DRM, as Microsoft notes matter-of-factly in a support article. Worse still, the DRM component in Windows can get corrupted for no apparent reason.

This is a common problem for users installing the BBC's iPlayer software, for example, which also uses Microsoft DRM. The fix, described in detail on the iPlayer support pages, involves deleting all the files in the hidden DRM folder within Windows. A side effect is that existing licences are destroyed - so existing DRM-protected files could well no longer play. In other words, there are multiple scenarios in which customers who have bought music, supposedly for a lifetime, may need to re-authorise their purchases. If the licence server has been turned off, the music will never, ever play again. What if you back up your licences? This used to be possible through Windows Media Player. But Microsoft removed the option from version 11, introduced for Windows Vista. Microsoft's Adam Anderson told us that licence backup did not work properly anyway.

Getting your backup

"The ability to back up content was not granted by every service, leading to user confusion and frustration," he says. "Third-party digital content service providers are best positioned to meet the backup and restoration needs of their customers." So the trail leads back to the licence server - which Microsoft is turning off for its customers. Why is it doing that? According to Rob Bennett, who wrote the shock email, it was too complicated to support. "Every time there is an OS upgrade, you saw support issues. People would call in because they couldn't download licences. We had to write new code, new configurations each time," he told CNet.

There are a few mitigating factors. One is that purchased downloads usually include the right to burn CDs - thus removing the DRM, and allowing proper backup. Though it's not quite perfect: most download formats are compressed. The CD will sound the same as the download - but if it is ripped back to a PC in a lossy format (such as MP3), the recompressed file will not sound as good.

Customers outside the US are not directly affected by Microsoft's move. Although several download services in the UK use Microsoft DRM - including MSN Music (which is run by Nokia), Napster and HMV - these stores have their own licence servers. Still, if Microsoft itself has done this, and if DRM for this type of purchase is on the way out, then customers with an investment in downloaded music should be cautious. Best burn them to CD, just in case. Some, however, won't let you. Subscription services such as Napster To Go, which gives temporary access to around 5m songs, will keep using DRM. But so far the subscription concept has not taken off.

Yet Rosenblatt thinks that subscriptions may turn out to be Apple's answer to the DRM-free competition - because it has already laid the groundwork with films which expire a certain length of time after being downloaded or watched. "You can now rent a movie on your iPod. The functionality on the iPod that enables that to happen is part of the functionality that you would need to support music subscription services," Rosenblatt says.

Same old problems

And that could mean the record labels will face the same problem all over again. Just as they remove DRM from their products, Apple would re-impose it. Apple customers with a subscription would probably never buy from third-party services, even while the likes of Amazon could undercut iTunes and be iPod-compatible.

Mark Mulligan, digital music analyst at Jupiter Research, also expects Apple to change its approach. "It's highly likely Apple will get into the next-generation service game. That could be Apple selling iPods preinstalled with unlimited access to music, or with a bundle to a subscription offering," he says. Mulligan sees the market evolving into multiple tiers. At the top end, a minority will be willing to pay a premium for the best quality, DRM-free downloads. The middle tier will be "subsidised offerings like Nokia's Comes With Music, where you buy a device and the cost of the music is included subsidised"; while at the bottom will be advertising-supported services such as Qtrax, SpiralFrog and We7, where free music is paid for by embedded advertising.

That would leave Apple with the top-end iTunes downloads and a subscription business. But would Jobs back it? In January 2007, Reuters asked him if Apple would do so. "Never say never, but customers don't seem to be interested in it," Jobs said. "The subscription model has failed so far." Which hardly rules it out forever. DRM might not stop pirates, but it does rivals. And in business, the latter can be a greater threat than the former.